Kazakh Audit Shows State Failures in BTA Bank’s Takeover

Nov. 8 (Bloomberg) -- BTA Bank exercised insufficient
control and arranged payments to creditors in violation of a
moratorium during its debt restructuring two years ago,
according to a Kazakh government audit obtained by Bloomberg.

The inspection, completed in February, found that the
Almaty-based lender was breaching national legislation and bank
regulations, a sign of an “inadequate level of control” on the
part of BTA executives, the central bank’s financial oversight
committee said in the document.

The bank also arranged repayments that bypassed BTA itself,
the regulator said. In violation of a plan approved in September
2010, BTA failed to create a development strategy for 2011
through 2015, according to the audit.

The audit suggests bungled oversight by the state-appointed
bank officials and their failure to steady BTA, which has blamed
its previous management for the implosion that preceded the
government takeover three years ago. BTA’s international
creditors had their investments slashed by almost 56 percent
after the biggest Kazakh lender at the time defaulted on $12
billion of debt in 2009.

BTA, which also failed to make an interest payment on its
July 2018 dollar bonds in January, said on Oct. 3 it reached a
non-binding agreement with creditors on restructuring $11.2
billion of liabilities. The bank won 92 percent creditor
approval for a restructuring plan in May 2010 paying cash and
issuing new debt.

Bonds Slump

BTA’s defaulted dollar-denominated notes due in 2018 rose,
sending the yield one basis point lower to 35.634 at 9:21 a.m.
in London. That compares with the 77.406 percent the bonds were
yielding on June 14, the highest since they started trading. The
yield on the securities dropped more than 15 percentage points
when the agreement with creditors was announced on Oct. 3, after
declining almost 12 percentage points over the previous two
days, according to data compiled by Bloomberg.

BTA declined to comment on details of the audit, citing the
confidentiality of its results in a statement e-mailed Nov. 5.
It said the last audit was carried out using data as of Nov. 1,
2011, and referred questions about the assessment of the bank’s
management to the regulator.

The National Bank of Kazakhstan didn’t comment on a request
sent on Oct. 31. The regulator’s audit of BTA “didn’t find
anything new for us, from a negative point of view,” Kuat
Kozhakhmetov, head of the central bank’s financial oversight
committee, told reporters on Sept. 5.

Thorough Analysis

“Information about violations of any procedures found
during inspections by regulatory authorities is thoroughly
analyzed,” BTA said in the Nov. 5 statement. “If necessary,
working groups are created to establish the fact of violations
and take steps to eliminate them.”

BTA’s state-run parent Samruk-Kazyna, which took over the
bank in February 2009, injected 883 billion tenge ($5.9 billion)
to raise BTA’s equity capital in 2009 and 2010, the equivalent
of about 4 percent of gross domestic product. According to the
terms of the second restructuring agreement, Samruk-Kazyna will
convert about $1.4 billion of its deposits into BTA capital,
increasing its stake to over 95 percent from current 81.5
percent.

Biggest Fraudsters

BTA yesterday asked a U.K. court to order former executives
including Mukhtar Ablyazov, who has been in hiding since
February, to return more than $2 billion the lender said they
stole using fake loans, back-dated documents and offshore
companies. Ablyazov, a former chairman whom BTA blamed for
failures that preceded the state takeover, may “rank as one of
the largest fraudsters in corporate history” if the lender
succeeds, lawyers for BTA said in documents filed at a London
court.

In April, Kazakhstan reopened criminal cases against three
BTA managers who were accused of “large-scale embezzlement”
after the state’s takeover, according to the Prosecutor
General’s Office. The office, based in the Kazakh capital of
Astana, declined to comment on the reopened investigations to
avoid compromising the secrecy of the investigation, according
to a statement faxed on Oct. 31.

In its audit, the central bank found that BTA carried out
two deals during a moratorium on payments to creditors.

Credit Risk

“During the restructuring of liabilities, the bank’s
management made decisions to approve the transfer of borrowers’
credit risk directly to foreign banks, whereas the bank had the
ability to secure a discount on its liabilities as part of the
restructuring,” the regulator said in the document.

That contradicts pledges made in a presentation outlining
its second debt-restructuring proposal pitched to creditors in
January.

“As it did during the 2009-2010 restructuring process, BTA
is committed to treat fairly all creditors concerned by the
proposed restructuring,” the bank said in the presentation.

The Kazakh Prosecutor General’s Office declined to comment
on the two transactions.

BTA Shortcomings

The central bank’s other complaints about BTA included lack
of “managerial or any other reporting” to the board of
directors by the division managing distressed loans, according
to the document. The division provided reports in the form of
presentations on a need basis, usually once a year, the
regulator said.

BTA bet on the recovery of bad loans and partly blamed it
for the failure to fulfil obligations after the first debt
overhaul. The bank is presenting its second restructuring plan
to investors this week and will meet noteholders on Nov. 16 to
ask for their approval of the proposal.